When Contractual Good Faith Meets a Controversial M&A Issue: The Sandbagging Practice in International Arbitration

• Author: Maxime Panhard
• Position: Maxime Panhard is a French lawyer specialized in international litigation, Ph.D candidate at the Sorbonne University in Paris, and visiting researcher at Fordham University in New York. He is member of the Paris Bar and of the Madrid Bar and teaches law at the Paris Dauphine University. He practices law in Paris, Madrid, and New York.
• Pages: 69-86

When Contractual Good Faith Meets a

Controversial M&A Issue: The Sandbagging

Practice in International Arbitration

M

AXIME

P

ANHARD

*

I. Introduction

International Commercial Arbitration (ICA) is a forum where different

legal systems meet, merge, and create autonomous rules, mostly unwritten

and sometimes subjective. Given this autonomy, one interesting way to

study the ICA approach to certain issues is to start with comparative law and

add specificities of this system. The results give insights about what can be

expected in ICA, as well as an illustration of the specificities of this system.

This article analyzes a mergers and acquisitions (M&A) issue known as the

sandbagging practice. Sandbagging occurs when the buyer of a company

brings a claim against the seller after the deal has closed for a breach of

representation that the buyer knew about before the closing.

1

This issue

occurs in civil and common law systems, but is approached with different

legal grounds, including the contractual good faith principle. Despite this,

ICA is the most used dispute resolution method with regard to transnational

M&A disputes, and implies a very specific role for the contractual good faith

principle.

2

Given the different national system solutions to the contractual

good faith principle, it must be determined whether the frequent use of the

good faith principle by international arbitrators can also be used to solve

sandbagging practice cases in ICA.

* Maxime Panhard is a French lawyer specialized in international litigation, Ph.D candidate

at the Sorbonne University in Paris, and visiting researcher at Fordham University in New

York. He is member of the Paris Bar and of the Madrid Bar and teaches law at the Paris

Dauphine University. He practices law in Paris, Madrid, and New York.

1. See Charles K. Whitehead, Sandbagging: Default Rules and Acquisition Agreements, 36 D

EL

.

J. C

ORP

. L. 1081, 1081 (2011).

2. See Beata Gessel-Kalinowska vel Kalisz, Representations and Warranties in Cross Border

Mergers and Acquisitions: The Challenges of Cultural Diversity, 24 ICC I

NTERNATIONAL

C

OURT

OF

A

RBITRATION

B

ULLETIN

1, 32 (2013) (“The vast majority of disputes arising out of M&A

transactions are resolved outside State courts. Arbitration is favoured [sic] by parties looking for

expediency, confidentiality, a good understanding of business needs in M&A transactions on the

part of the tribunal, and a spirit of cooperation that at best could lead to a settlement and will

otherwise result in a fair and equitable award under applicable law.”); Ronald L. Hicks, Jr. &

Amanda R. Gerstnecker, Litigation Issues in Asset Purchase Agreements, A

SS

’

NOF

C

ORP

. C

OUNS

.,

Dec. 1, 2011.

THE YEAR IN REVIEW

AN ANNUAL PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW

PUBLISHED IN COOPERATION WITH

SMU DEDMAN SCHOOL OF LAW

70 THE INTERNATIONAL LAWYER [VOL. 51, NO. 1

As this issue is controversial in different legal systems and international

arbitrators widely use the good faith principle because of its subjectivity,

3

sandbagging practice cases might be solved in ICA with the application of

the good faith principle, balanced by the binding force of contracts.

4

A. T

HE

S

ANDBAGGING

P

RACTICE

: A C

ONTROVERSIAL

I

SSUE

Given the definition of the sandbagging practice, some practical reasons

made it a controversial issue, which remains sensitive in different legal

systems.

1. Definition of the Sandbagging Practice

The common definition of sandbagging usually refers to the idea of unfair

treatment and misrepresentation.

5

Indeed, this expression comes from the

nineteenth century when robbers used sandbags to knock their victims out in

order to rob them.

6

Since the 1940’s, this expression is used in poker when a

player acts like he does not have a good hand, when he actually does, in

order to take advantage of his co-players.

7

In golf, sandbagging occurs when

a player pretends he is bad when in actuality he is good in order to gain

handicap strokes and increase his chances of winning.

8

In procedural law,

the act of sandbagging has different meanings. It can be the act of

voluntarily delaying a procedure, “in order to gain some benefit from the

delay or prejudice to one’s opponent.”

9

It can also mean voluntarily

remaining silent when there is an error at a trial, with the idea of using the

error for appeal if the decision does not meet a party’s expectations.

10

Additionally, it defines the actions of a company facing a hostile takeover

3. See Munir Maniruzzaman, The Concept of Good Faith in International Investment Disputes-The

Arbitrator’s Dilemma, K

LUWER

A

RBITRATION

B

LOG

(Apr. 30, 2012), http://kluwerarbitration

blog.com/2012/04/30/the-concept-of-good-faith-in-international-investment-disputes-the-

arbitrators-dilemma-2/.

4. See Door Janice Wall & Omar Amin, The Implied Duty Of Good Faith In Commercial

Contracts And Its Impact On Deferred Consideration Clauses In Corporate Sale And Purchase

Agreements, L

EGAL

B

US

. W

ORLD

P

OSTS

(May 22, 2017), https://www.legalbusinessworld.nl/

single-post/2017/05/22/The-Implied-Duty-Of-Good-Faith-In-Commercial-Contracts-And-

Its-Impact-On-Deferred-Consideration-Clauses-In-Corporate-Sale-And-Purchase-

Agreements.

5. See Sandbag, M

ERRIAM

-W

EBSTER

L

EARNER

’

S

D

ICTIONARY

(last visited Oct. 5, 2017),

http://www.learnersdictionary.com/definition/sandbag.

6. Glenn D. West & Kim M. Shah, Debunking the Myth of the Sandbagging Buyer: When Sellers

Ask Buyers to Agree to Anti-Sandbagging Clauses, Who is Sandbagging Whom?, 11 M

ERGERS

&

A

CQUISITIONS

L. 1, 3 (2007).

7. See Aleksandra Miziolek & Dimitrios Angelakos, Sandbagging: From Poker to the World of

Mergers and Acquisitions, 92 M

ICH

. B. J. 6, 30 (2013).

8. Sandbagging, B

OUVIER

L

AW

D

ICTIONARY

(2012).

9. Id.

10. Sandbagging, B

LACK

’

S

L

AW

D

ICTIONARY

(10th ed. 2014).

THE YEAR IN REVIEW

AN ANNUAL PUBLICATION OF THE ABA/SECTION OF INTERNATIONAL LAW

PUBLISHED IN COOPERATION WITH

SMU DEDMAN SCHOOL OF LAW